Tackling the Tax Challenges of Global Digital Economy

It was much easier to tax goods when they could still be physically located and easily traced. However, with the rise of digital globalization, boundaries have become harder to discern. 

Most technology companies have been adept at avoiding paying taxes by using archaic tax laws to say that they are a company based in a tax haven. According to the European Commission, companies currently pay an average of 9.5% tax rate compared to the 23.2% paid by traditional firms. Since governments were keen on keeping these technology companies that brought high profits, they initially chose to look the other way. But after the 2008 recession, the need for tax revenue had governments rethink their stances.

The main targets are mostly American companies. According to Bloomberg, financial services company Nasdaq had more value than all the non-American stock exchanges around the world. 

In 2015, OECD countries decided that they needed to tax digital companies fairly and comprehensively. However, members had a hard time coming up with a mutual agreement, prompting the EU to institute an EU-wide tax.

The EU digital tax proposal came in two parts. The first part focused on an interim tax that would be applied immediately to digital activities like online advertising or the sale of data generated from user-provided information. The second part was its long term goal to reform tax rules so that profits are registered and taxed where digital companies had significant user interaction even if they did not have a physical presence there. But discussions were soon scuttled by countries like Ireland, Sweden, Finland, and Denmark.

In 2019, France decided to institute its digital tax at a 3% level on digital revenue of companies with €750 million global revenue and digital sales of €25 million in the country. This applied to about 30 companies, which were mostly American with a couple of Chinese, German, British, and French companies as well. Other countries have followed suit, with Italy applying a digital sales tax of 3% on digital revenue from companies with global revenues of €750 million and Italian revenue of €5.5 million in January 2020. Turkey has also applied a 7.5% digital sales tax on companies with global €750 million revenue and TL 20 million local revenue in March 2020. India is looking to expand its digital taxes as well, which were initially a 6% levy on online advertising, but will now include a 2% rate on e-commerce operators and suppliers. Moreover, Israel, Austria, Spain, and Belgium are also currently contemplating a levy similar to France's. These taxes have derived from the EU's proposed model, and all countries are willing to repeal the taxes once they agree to a global model.

Although America wants more tax revenue from its companies, it is against any other nations taxing them. After the UK proposed a 2% levy on search engines, social media platforms, and online marketplaces that derive revenue from UK users, the Trump administration immediately stated that such a move would stall US-UK trade negotiations. 

The Fourth Industrial Revolution is picking up steam, and governments are struggling to keep up. Although the digital industry has innovated many economies, the government must consistently regulate it to prevent it from getting out of hand. 

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